TSI #24: Discover different stock types

Do you classify yourself as an active investor?

Do you love individual stocks like Apple, Amazon, Disney? If your answer is yes, then this article is perfect for you.

Do you know the idiom: “Different strokes for different folks”?

It means different things appeal to different people. And investing is no exception.

There are two main reasons why no stock is perfect for everyone:

1.  Different stages call for different stocks. If you’re close to retirement, you’ll probably avoid investing in things that can jump by 10% on a daily basis.
2. On the other hand, if you’re still young, you can easily afford to wait out such volatility.

Another crucial determinant is risk tolerance.

Some people are natural born gamblers.

They can (and probably will) watch their investments rapidly increase or decrease in value.

On the contrary, if you struggle with booking losses, you’ll probably stick to safer stocks.

That being said, let’s go over the six main types.

Blue Chips

"Blue chip" is an informal term for the most reliable and valuable companies on the market. They generally sell high-quality, widely accepted products and services, which enables them to survive in any market conditions.

Examples: Microsoft, Broadcom, Mastercard

Blue chips are a perfect balance of growth and stability, which is why they’re usually the top choice for investors with a medium risk tolerance.

Growth stocks

Growth stocks are known to focus on expanding their market share and thus attract more revenue. They usually don’t consider the bottom line too much.

Due to the nature of business, they tend to be very volatile.

Daily price changes of 10% are not that uncommon. Especially for smaller growth stocks.

Examples: Spotify, Crowdstrike, Square

They are perfect for investors who can take on more risk in order to be compensated a few years later (if such companies succeed).

Dividend stocks

As you might have guessed it, dividend stocks focus on returning money to their owners.

The idea is to generate enough profit, to compensate the shareholders.

But because they’re using their money to pay dividends, not much is left for growth.

Examples: Coca cola, Procter and Gamble, Altria

Dividend stocks are perfect for retirement. They can pay you generous cash flow while your portfolio remains fairly stable.

Cyclical stocks

Such companies heavily rely on market conditions. In times of economic distress, they struggle to grow and therefore focus on surviving. Car manufacturers are the perfect example.

When a recession is near, people stop buying new cars. It’s as simple as that.

Examples: General Motors, Hilton, Southwest Airlines

Cyclical stocks are a great option for those who can successfully predict the economic environment.

When times are good, they tend to outperform. When times are bad, they tend to struggle.

Defensive stocks

The only difference between defensive and dividend stocks is that defensive stocks are positioned in essential industries. Meaning, products we need on a daily basis.

We all need water, electricity, food, hygiene etc.

Examples: Walmart, CVS, Waste Management

Defensive stocks usually hold a special place in portfolios of risk averse investors.

They’re known and cherished for their stability.

Speculative stocks

The perfect choice for natural born gamblers.

Such companies tend to lure investors with big promises. Sometimes that can lead to rapid and substantial returns.

On the other hand, if things don’t go as planned, such stocks can lose substantially in a matter of days.

Examples: Draft Kings, Tesla, Snowflake

These stocks are reserved for the gamblers and dreamers.

Now that you know the six major types, it would be wise to assess your own investor personality. That will help you determine which stocks are perfect for you.

And even more importantly, which stocks to avoid.

So, note down these points and start investing today:

• Different stages of life call for different stocks
• Risk tolerance determines which stocks are great for you. And which are not
• When you’re investing in individual stocks, make sure you know what you can expect based on the type of stock